EIM02504 - Employment income: directors’ fees received by companies: exemption from charge to income tax under Part 2 of ITEPA

Section 6(5) ITEPA 2003, section 16B ITTOIA 2005, section 40A CTA 2009

Fees received in respect of work carried out as a director are in strictness assessable on the director as employment income. Tax should therefore be deducted from those fees under PAYE by the company with which the office of director is held.

For periods prior to 6 April 2018, HMRC allowed by extra-statutory concession (ESC) for tax not to be deducted under PAYE in cases where a company (the appointing company) had the right to appoint a director to the board of another company (the paying company) by virtue of its shareholdings in, or by a formal agreement with, that company. This practice was allowed by ESC A37 which set out the conditions that had to be met for this concession to apply. Where applicable, the concession allowed the directors’ fees to be treated as income of the appointing company and not of the director.

From 6 April 1980 this practice was also extended to cases where the appointing company had no formal right to appoint the director to the board but the director was nevertheless required to (and did) hand over his fees to that company. This was subject to the additional requirement that the company was not a company over which the director had control.

With effect from 6 April 2018, the Enactment of Extra-Statutory Concessions Order 2018 enacted this concession and its associated conditions by amending section 6(5) of ITEPA and introducing section 16B of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) and section 40A of the Corporation Tax Act 2009 (CTA 2009).

Section 6(5) now provides that employment income is not charged to tax under Part 2 of that Act if it is within the charge to tax under:

• Part 2 of ITTOIA by virtue of section 16B of that Act, or
• Part 3 of CTA 2009 by virtue of section 40A of that Act

Section 16B ITTOIA and section 40A CTA 2009 set out conditions that, if met, mean that income paid to or for the benefit of a director is treated as a receipt of a trade carried on by the company that appointed the director. For details of the conditions that must be met see EIM02505. For details of the process that applies in these circumstances see EIM02506.